Investing in commercial real estate can be a great way to build wealth over time. But it is essential that you consider the way the gains will impact the tax burden that you will be facing when the property is sold. Instead of paying high tax bills due to capital gains, you might consider 1031 or like-kind commercial real estate exchanges.
This strategy helps by maximizing the equity that is available for new real estate purchases. At the same time, the wealth is held in the properties so that you don’t have cash-in-hand to be taxed.
Like-Kind Commercial Real Estate Exchanges
The basics of a like-kind exchange are when a tax-deferred transaction occurs to roll the equity from one asset into a similar asset. Typically, the sale of a real estate asset triggers capital gains taxes and the investor needs to carry the liability of this tax bill. But new legislation was recently passed that allowed the exchange of one business for another. For example, a tangible piece of property could be exchanged for another business or investment.
According to the Internal Revenue Service (IRS) code, payments for both short-term and long-term capital gains taxes can be deferred with the right strategy. When the proceeds are reinvested in another property that holds an equal or greater value, then it falls under the category of like-kind commercial real estate exchanges.
All real estate can qualify for this exchange, except for a personal residence or vacation home. If you hold a real estate property for investment or business, then it will likely qualify for a like-kind exchange.
Time Limits and Other 1031 Rules
As an investor, if you are planning to sell an asset and purchase another property, then specific steps need to be followed so that you qualify for the 1031 exchange. When the replacement property is purchased within the specified timeframe, then it defers the payment since the cash is tied up in the property.
The proceeds of the sale must be rolled into the replacement property within 180 days from the first property sale. Additionally, the replacement property needs to be identified within 45 days of the sale of the first asset. Many times, investors choose to identify up to three replacement properties to have back-ups in case something goes wrong with the first choice.
Another alternative is to look at crowdfunding or commercial investment partnership options. In this circumstance, the money can be rolled into the investment opportunity without the need to stress over the identification and purchase of a single property.
Current Laws and Regulations
When you are evaluating like-kind commercial real estate exchanges, it’s always best to review the current regulations and laws. Specific forms need to be completed to tie the two transactions together. Without the support of a team that understands this properly, you might be facing an accidental tax bill that needs to be paid. First National Realty Partners is here to help with the leading commercial real estate investment opportunities that are available. Call today to learn more about the services that are offered.